FORM 10-Q
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
(Mark One)
   
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2010
 
OR
 
     
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                     to                    
 
Commission File No.   333-72376
 
MEDICAL CONNECTIONS HOLDINGS, INC .
(Exact name of registrant as specified in its charter)
 
 
Florida
 
65-0920373
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
2300 Glades Road Suite 202 E Boca Raton, Florida  
33431
  (Address of principal executive office)  
(Zip Code)
     
Registrant’s telephone number, including area code:   (561) 353-1110
33----dddd33 
 
Former name, former address and former fiscal year, if changed since last report.

 
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ      No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  o    No þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
(Do not check if smaller reporting company)
o
Smaller reporting company
þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)   Yes o     No þ
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
 
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock as of the latest practicable date:
 
 72,462,656 shares of Common Stock, $.001 par value as of August 4, 2010
 
 
 
 
 
 
 
INDEX

PART I. – FINANCIAL INFORMATION
 
Item 1.   Financial Statements      
         
  Condensed Consolidated Balance Sheets at June 30, 2010 (unaudited) and December 31, 2009     1  
  Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2010 and June 30, 2009 (unaudited)     2  
  Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2010 and June 30, 2009 (unaudited)     3  
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and June 30, 2009 (unaudited)     4  
 
Notes to Condensed Consolidated Financial Statements as of June 30, 2010 (unaudited)
    5 - 9  
           
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations     10  
           
Item 3. Quantitative and Qualitative Disclosures about Market Risk     14  
           
Item 4T.  Controls and Procedures     14  
           
  PART II. – OTHER INFORMATION  
           
Item 1.  Legal Proceedings     15  
           
Item 1A.  Risk Factors     15  
           
Item 2. Unregistered Sales of Equity Securities     15  
           
Item 3. Defaults upon Senior Securities     15  
           
Item 4.  (Removed and Reserved)     15  
           
Item 5.   Other Information     15  
           
Item 6. Exhibits        16  
 
 
 
 
 
ITEM 1.   FINANCIAL STATEMENTS
 
 
MEDICAL CONNECTIONS HOLDINGS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009
 
 
   
June 30,
   
December 31,
 
   
2010
   
2009
 
 ASSETS
           
             
 Cash
  $ 546,230     $ 1,017,843  
 Accounts receivable, net
    1,117,773       804,382  
 Prepaid expenses & other current assets
    378,968       98,515  
 Total current assets
    2,042,971       1,920,740  
                 
 Property and equipment
    689,028       386,953  
     Less: accumulated depreciation
    271,901       243,475  
      417,127       143,478  
 Other assets
               
 Security deposit
    206,642       206,642  
 Intangible asset, net
    173,981       218,981  
      380,623       425,623  
 Total assets
  $ 2,840,721     $ 2,489,841  
                 
 LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
 Current liabilities
               
 Accounts payable
  $ 214,361     $ 129,227  
 Accrued expenses
    186,491       85,063  
 Total current liabilities
    400,852       214,290  
 Total liabilities
    400,852       214,290  
                 
 Stockholders' equity
               
    Preferred stock, Class A, $.001 par value; 1,000,000 shares
               
     authorized, 56,395 and 85,220 issued and outstanding, respectively
    56       85  
    Preferred stock, Class B, $.001 par value; 1,000,000 shares
               
     authorized, issued and outstanding
    1,000       1,000  
    Preferred stock, Class C, $.001 par value; 460,000 shares
               
     authorized, issued and outstanding
    460       460  
Common stock, $.001 par value, 125,000,000 shares authorized,
         
     72,237,126 and 52,378,794  shares issued and outstanding, respectively
    72,237       52,379  
   Additional paid-in capital
    40,450,965       35,766,004  
   Accumulated deficit
    (38,084,850 )     (33,544,377 )
 Total stockholders' equity
    2,439,869       2,275,551  
 Total liabilities and stockholders' equity
  $ 2,840,721     $ 2,489,841  
 
See the accompanying notes to the condensed consolidated financial statements
 
 
1
 
 
MEDICAL CONNECTIONS HOLDINGS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009  (UNAUDITED)
 
 
   
2010
   
2009
 
 Revenue
  $ 1,910,202     $ 1,555,315  
                 
 Direct costs of revenue
    1,414,593       1,160,906  
 Sales and marketing expenses
    40,252       99,826  
 Recruiting - salaries and costs
    418,619       514,535  
 Professional and consulting fees
    722,150       588,914  
 General and administration expenses
    1,013,506       864,088  
                 
 Total operating expenses
    3,609,120       3,228,269  
      (1,698,919 )     (1,672,954 )
                 
 Interest expense
    -       16  
 Interest income
    (5 )     (34 )
 Other
    339,686       63,566  
 Total other expenses, net
    339,681       63,548  
                 
 Loss before income taxes
    (2,038,600 )     (1,736,503 )
                 
 Income taxes
    -       -  
                 
 Net (loss)
  $ (2,038,600 )   $ (1,736,503 )
                 
 Net loss per common share - basic and fully diluted
  $ (0.03 )   $ (0.05 )
Weighted average common shares outstanding
 
   - basic and fully diluted
    67,171,382       33,273,026  
 
See the accompanying notes to the condensed consolidated financial statements
 
 
2
 
 
MEDICAL CONNECTIONS HOLDINGS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009  (UNAUDITED)
 
 
   
2010
   
2009
 
 Revenue
  $ 3,338,792     $ 3,084,963  
 Direct costs of revenue
    2,458,906       2,263,012  
 Sales and marketing expenses
    111,234       210,731  
 Recruiting - salaries and costs
    855,956       1,141,233  
 Professional and consulting fees
    1,497,677       893,623  
 General and administration expenses
    1,963,580       1,690,445  
 Total operating expenses
    6,887,353       6,199,044  
      (3,548,562 )     (3,114,081 )
 Interest expense
    -       61  
 Interest income
    (16 )     (142 )
 Other
    991,928       102,831  
 Total other expenses, net
    991,912       102,750  
 Loss before income taxes
    (4,540,473 )     (3,216,831 )
 Income taxes
    -       -  
 Net (loss)
  $ (4,540,473 )   $ (3,216,831 )
 Net loss per common share - basic and fully diluted
  $ (0.07 )   $ (0.10 )
Weighted average common shares outstanding
 
   - basic and fully diluted
    62,305,739       31,568,065  
 
See the accompanying notes to the condensed consolidated financial statements
 
 
3
 
 
MEDICAL CONNECTIONS HOLDINGS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (UNAUDITED)
 
 
   
2010
   
2009
 
Cash flow from operating activities
           
Net loss
  $ (4,540,473 )   $ (3,216,831 )
                 
Adjustments to reconcile net loss to net cash
               
Depreciation and amortization
    73,426       49,838  
Common stock issued for compensation
    158,750       115,000  
Common stock issued for common stock
    -       (271,481 )
CHANGES IN ASSETS AND LIABILITIES
               
Accounts receivable
    (313,389 )     221,142  
Security deposit
    -       21,898  
Prepaid expenses & other current assets
    (280,453 )     28,575  
Accounts payable and accrued expenses
    186,562       (193,001 )
                 
Net cash used in operating activities
    (4,715,577 )     (3,244,860 )
                 
Cash flow from investing activities
               
Proceeds from sale of investment property
            400,000  
Acquisition of property and equipment
    (302,075 )     (55,796 )
Net cash provided by (used in) investing activities
    (302,075 )     344,204  
                 
Cash flow from financing activities
               
Proceeds from issuance of common stock and warrants
    4,546,040       3,088,989  
Net cash provided by financing activities
    4,546,040       3,088,989  
                 
Net increase (decrease) in cash and cash equivalents
    (471,612 )     188,333  
                 
Cash and cash equivalents at beginning of year
    1,017,843       599,058  
                 
Cash and cash equivalents at end of year
  $ 546,230     $ 787,391  
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ -     $ 61  
Taxes
  $ -     $ -  
 
See the accompanying notes to the condensed consolidated financial statements
 
 
4
 
 
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
 
 Medical Connections Holdings, Inc. and its subsidiaries, (the "Company") is an employment and executive search firm that provides recruiting services to its clients within the healthcare and medical industries throughout the United States. The Company was formed in Florida for the purpose of specializing in the recruitment and placement of healthcare professionals in a variety of employment settings.
In our opinion, the accompanying condensed consolidated balance sheets and related interim statements of condensed consolidated operations and cash flows include the adjustments (consisting of normal and recurring items) necessary for their fair presentation in conformity with United States generally accepted accounting principles ("GAAP") and represent our accounts after the elimination of inter-company transactions. Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates. The unaudited information included in this Form 10-Q should be read in conjunction with the consolidated financial statements contained in our 2009 Annual Report on Form 10-K. Interim results are not necessarily indicative of results for a full year.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
PRINCIPLES OF CONSOLIDATION
 
The consolidated financial statements include the accounts of Medical Connections Holdings, Inc., and its wholly-owned subsidiaries. All material inter-company transactions and balances have been eliminated in consolidation.
 
USE OF ESTIMATES
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
ADVERTISING
 
The Company's policy is to expense the costs of advertising and marketing as they are incurred. Advertising expense for the six months ended June 30, 2010 and 2009 was $111,234 and $210,731, respectively.
 
INCOME TAXES
 
We account for income taxes in accordance with ASC 740, Accounting for Income Taxes, as clarified by ASC 740-10, Accounting for Uncertainty in Income Taxes.  Under this method, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria of ASC 740.
 
 
5
 
 
ASC 740-10 requires that we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the “more-likely-than-not” threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

COMMON STOCK ISSUED FOR OTHER THAN CASH

Services purchased and other transactions settled in the Company's common stock are recorded at the estimated fair value of the stock issued if that value is more readily determinable than the fair value of the consideration received.

INCOME (LOSS) PER SHARE OF COMMON STOCK

Income (Loss) per share: Basic loss per share excludes dilution and is computed by dividing the loss attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that shared in the loss of the Company. Diluted loss per share is computed by dividing the loss available to common shareholders by the weighted average number of common shares outstanding for the period and dilutive potential common shares outstanding unless consideration of such dilutive potential common shares would result in anti-dilution. Common stock equivalents were not considered in the calculation of diluted loss per share as their effect would have been anti-dilutive for the six months ended June 30, 2010 and 2009.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount reported in the balance sheets for cash and cash equivalents, accounts receivable, loans payable, lines of credit, convertible debentures and promissory notes approximate fair value because of the immediate or short-term maturity of these financial instruments.

NOTE 3 - STOCKHOLDERS' EQUITY

 PREFERRED STOCK - A

As of June 30, 2010, the Company has 1,000,000 shares of Preferred Stock A authorized at $0.001 par value per share and 56,395 were issued and outstanding.   Each holder of the Series A Preferred Stock may convert each share of Preferred Stock into nineteen (19) shares (the “Conversion Ratio”) of the Company’s Common Stock at any time. The Conversion Ratio is subject to adjustment in the event of any recapitalization or reorganization.  The Holders of the Series A Preferred Stock are required to tender the Series A Preferred Stock Certificate to the Company for redemption prior to issuance of any shares of Common Stock. Until such shares of Series A Preferred Shares are exchanged for the Company’s Common Shares, each holder of a Series A Preferred Share shall be entitled to one vote per share on all matters which are brought to a vote of the holders of our Common Stock.  Holders of the Series A Preferred Stock have no other rights or preferences. As of June 30, 2010, a total of 475,460 shares of Series A Preferred Stock have been converted into 9,033,740 shares of our Common Stock. There were 12,375 shares of Series A Preferred Stock converted into 235,125 shares of Common Stock during the three months ended June 30, 2010.
 
 PREFERRED STOCK - B

As of June 30, 2010, the Company has 1,000,000 shares of Series B Preferred Stock authorized at $0.001 par value per share and 1,000,000 issued and outstanding.  Holders of the Series B Preferred Stock shall be entitled to ten votes per share for each Series B Preferred Stock beneficially owned on all matters brought to a vote of the holders of the Common Stock.
 
 
6
 

 PREFERRED STOCK - C

As of June 30, 2010, the Company has 460,000 shares of Series C Preferred Stock authorized, $0.001 par value per share, and 460,000 shares issued and outstanding.  Each share of Series C Preferred Stock has 100 votes per share and will vote together with holders of the Company's common stock and Series B Preferred Stock as a single class on all matters presented to the Company's shareholders at an annual or special meeting (or pursuant to written consent), except with respect to the matters relating to the election of directors.  The holders of a majority of shares of the Company's Series C Preferred Stock will have the right to appoint a majority of the directors serving on the Company's Board. The Series C Preferred Stock does not have any dividend or liquidation preferences.  
 
COMMON STOCK
 
As of June 30, 2010, the Company has 125,000,000 shares of Common Stock authorized at $0.001 par value per share and 72,237,126 issued and outstanding. For the three months ended June 30, 2010, the Company sold 9,477,040 shares of Common Stock to accredited or sophisticated shareholders for $2,369,043. During the three months ended June 30, 2010, the Company issued 1,000,000 shares of its Common Stock to two executives for services rendered, at $ 0.13 per share fair market value, for a total cost of $130,000.
 
NOTE 4 - STOCK OPTIONS AND WARRANTS

No stock options were issued or vested in the three months ended June 30, 2010.  At June 30, 2010, the Company had two stock based compensation plans:  (i) the Medical Connections Holdings, Inc. 2010 Stock Incentive Plan (“2010 Plan”) and (ii) the Medical Connections Holdings, Inc. 2006 Stock Incentive and Compensation Plan ("2006 Plan").    The Company accounts for the fair value of its grants under the 2010 Plan and the 2006 Plan in accordance with FASB ASC Topic 718.

In June 2010, the Company's shareholders approved the 2010 Plan pursuant to an information statement.  The 2010 Plan provides for the granting of up to 10 million shares of the Company's common stock through a variety of stock-based and cash-based awards to eligible individuals.   The stock based awards include stock options, restricted stock grants, stock appreciation rights, performance shares and performance units. Employees of the Company and its subsidiaries, members of the Board of Directors, independent consultants and advisors are eligible to participate in the 2010 Plan. The granting and vesting of stock and cash-based awards under the 2010 Plan is authorized by the Company’s Board of Directors or a committee of the Board of Directors .

The 2006 Plan provides for the granting of up to 50,000 shares of the Company's common stock through a variety of stock-based awards to eligible individuals.   The stock based awards include stock options, restricted stock grants and registered stock.  Employees of the Company and its subsidiaries, members of the Board of Directors, independent consultants and advisors are eligible to participate in the 2010 Plan. The granting and vesting of stock and cash-based awards under the 2006 Plan is authorized by the Company’s Board of Directors or a committee of the Board of Directors .

A summary of the status of the Company's stock option plans as of June 30, 2010 is presented below:
 
 
7
 

Warrant Grants
 
In connection with various financings that we have secured, we have outstanding warrants to purchase a total of 6,333,494 shares of our common stock.
 
No. of Warrants     Grant Date     Exercise Price     Expiration Date  
  3,553,359     2008     $ 1.50       2010  
  232,854     2009     $ 1.00       2011  
  2,547,281     2009     $ 0.75       2011  
 
NOTE 5 - PROVISION FOR INCOME TAXES
 
The Company reported no tax expense or benefit for the six months ended June 30, 2010 due to the net operating losses incurred during the period and a valuation allowance established against 100% of the Company’s deferred tax assets. At June 30, 2010 deferred tax assets consist of the following:
 
 
 
2010
 
         Deferred tax asset
  $ 10,745,000  
         
         Less: valuation allowance
    (10,745,000 )
         
         Net deferred tax assets
  $ 0  
 
 As of June 30, 2010, the Company had accumulated deficits approximating $30,700,000 available to offset future taxable income through 2027. The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in the future period.
 
Management has assessed the realization of the net deferred tax assets and has determined that it is more likely than not that the  Company’s deferred tax assets for its  net operating loss carry forwards will not be realized. Due to the uncertainty of their realization, a valuation allowance of 100% continues to be provided against those net operating loss carry forwards.
 
The Company adopted the provisions of ASC 740, previously FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes .  The statute of limitations is still open on years 2007 and subsequent. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than–not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date the Company applied ASC 740 to all tax positions for which the statute of limitations remained open. As a result of the implementation of ASC 740, the Company did not recognize an increase in the liability for uncertain tax positions.
 
 
8
 
 
The Company is subject to income taxes in the U.S. federal jurisdiction and a number of state jurisdictions, including the state of Florida. The tax regulations within each jurisdiction are subject to interpretation of related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local examinations by tax authorities for the years before 2007.
 
NOTE 6- GOING CONCERN

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. The Company has sustained operating losses and its revenue stream is not sufficient to fund expenses at this time. The Company has issued stock to continue to fund operations. The Company's continued existence is dependent upon its ability to generate sufficient cash flows from equity financing and service revenues. These items raise substantial doubt about the Company's ability to continue as a going concern.

In view of these matters, realization of the assets of the Company is dependent upon the Company's ability to meet its financial requirements and the success of future operations. These consolidated financial statements do not include adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

NOTE 7- STOCK PURCHASE AGREEMENT

On March 12, 2010, Medical Connections Holdings, Inc. (the "Company") entered into a stock purchase agreement ("Stock Purchase Agreement") with the shareholders pursuant to which the Company will acquire all of the issued and outstanding capital stock of Trustaff Management, Inc., an Ohio corporation and its five wholly-owned limited liability companies. Trustaff is a national health care staffing company with approximately 100 corporate staff supporting 500 healthcare professional working at various clients throughout the United States.  Based on financial information provided to the Company, Trustaff had revenues in excess of $42 million during fiscal 2009, with profits in excess of $4.4 million. Trustaff's executive offices are located in Cincinnati, Ohio.
 
 Under the terms of the Stock Purchase Agreement, the Company expects to pay a purchase price equal to approximately $26 million, with $19.5 million payable in cash at the closing, $4 million payable pursuant to a three year promissory note and $2.5 million will be placed in escrow to be used to fund any indemnification claims relating to certain tax liabilities.  The Company will also issue 1.5 million shares of its common stock to the Trustaff shareholders at the closing.    The purchase price is subject to adjustments following the closing.
 
 At the closing, the Company will also enter into employment agreements with four key employees/founders of Trustaff.  The closing of the transaction, which is currently expected to occur in the third quarter of this calendar year, is subject to customary closing conditions, including the Company's receipt of adequate financing to close the transaction.  There can be no assurances that the Company will be able to close this transaction.
 
NOTE 8 – SUBSEQUENT EVENTS
 
         On July 16, 2010, our former Chief Executive Officer resigned. On July 19, 2010, he repaid to the Company $158,642 which was included in prepaid expenses in the Company’s Consolidated Balance Sheet as of June 30, 2010. In connection with his resignation, our former Chief Executive Officer entered into a separation and release agreement ("Separation Agreement") with the Company effective as of July 16, 2010. Pursuant to the Separation Agreement, our former Chief Executive Officer returned the 500,000 shares of the Company's Series B Preferred Stock and the 230,000 shares of the Company’s Series C Preferred Stock beneficially owned by him to the Company, effective as of July 16, 2010. The shares involved were subsequently returned to the Company and are available for reissuance as part of any series of blank check preferred shares.
 
 
 
 
9
 
 
In this Quarterly Report on Form 10-Q, the terms "Company," "we," "us," and "our" refer to Medical Connections Holdings, Inc.  and its wholly-owned and majority-owned subsidiaries.
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward Looking Statements
 
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding  industry prospects or future results of operations or financial position, made in this Quarterly Report on Form 10-Q are forward-looking. We use words such as anticipates, believes, expects, future, intends, and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Actual results could differ materially for a variety of reasons, including, those risks described in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (“SEC”) on March 30, 2010, and the risks discussed in other SEC filings. These risks and uncertainties, as well as other risks and uncertainties, could cause our actual results to differ significantly from management’s expectations. The forward-looking statements included in this report reflect the beliefs of our management on the date of this report. We undertake no obligation to update publicly any forward-looking statements for any reason.
 
General                      
 
Medical Connections Inc., the Company’s wholly owned subsidiary, is a national provider for medical recruitment and staffing services.  Established in 2002 to satisfy the increasing need for qualified healthcare professionals, the Company’s business is to identify, select and place the best allied health specialists, pharmacists, physicians, nurses and hospital management executives. The Company provides recruiting and staffing services for permanent and temporary positions with options for the clients and candidates to choose the most beneficial working arrangements.
 
The Company generates revenues primarily from permanent placement hires and contract appointments:

●   
Permanent Placement Hires: This activity includes the hiring of allied health professionals, nurses, physicians, pharmacists and other medical personnel to be employed in healthcare or research facilities. Under this arrangement, we receive a placement fee ranging from 10% to 30% of the employee’s initial annual salary, or a negotiated fee, which is predetermined based upon medical specialty.
 
●   
Contract Appointments : This represents temporary hires (typically, 13 week contracts) made by healthcare facilities to economically cover short staffing during periods of high-seasonal activity, vacations, leave of absences, etc. This also includes contracts for what is commonly known as “travel positions,” which are for allied health professionals, nurses or physicians who are willing to take temporary assignments outside their home region. Under this arrangement, we are the employer of record for the healthcare professional. The healthcare facility remits a fee to us that include all employment overhead, as well as a surcharge for the service. The revenue from this activity comes from the commission and surcharge for the service.

Potential Acquisitions:   We may expand our operations through the acquisition of other medical staffing or placement agencies   Acquisitions would enable us to increase revenue and to integrate the acquired company’s operations into our existing business.  If successful, we will be able to extend our market presence.  On March 12, 2010, we entered into a stock purchase agreement to acquire all of the issued and outstanding capital stock of Trustaff Management, Inc., an Ohio corporation and its five wholly-owned limited liabilities companies.  We are in the process of completing our due diligence and there can be no assurances that we will be able to close this acquisition.
 
 
10
 

Three Months Ended June 30, 2010 (“second quarter of  2010”) Compared to Three Months Ended June 30, 2009 (“second quarter of 2009”)

Revenue for the second quarter of 2010 was $1,910,202, an increase of $354,887, or 22.9%, when compared to $1,555,315 in the second quarter of 2009.   The two main components of revenue are permanent placement hires and contract appointments.

Revenue from permanent placement increased $77,327, or 34.4%%, to $302,495 for the second quarter of 2010 from $225,168 in the second quarter of 2009. The increase in permanent placement hires in the second quarter of 2010  was due to the gradually improving employment picture in healthcare.

Revenue from contract appointments increased $277,557, or 20.9%, to $1,607,705 in the second quarter of 2010 from $1,330,148 in the second quarter of 2009. This increase is attributable to the gradually increasing use of contract hires in the allied field.
 
Direct Costs associated with contract appointments increased $251,210, or 21.7%, to $1,411,843 in the second quarter of 2010 from $1,160,633 in the second quarter of 2009. These costs represent personnel salaries and benefits, temporary housing and travel costs. Direct Costs increased at a slightly higher rate than revenue due to a change in the mix of contracts during the period. The gross profit from contract appointments increased to $195,862, (12.2% of revenue) in the second quarter of 2010 from $169,515 (12.7% of revenue) in the second quarter of 2009.
 
Sales and marketing expenses were $40,252 in the second quarter of 2010, a decrease of $59,574, or 59.7%, from $99,826 in the second quarter of 2009. The decrease is due to ongoing efforts to maximize returns from our marketing expenditures.

Recruiting salaries and costs decreased $95,916, or 18.7%, to $418,619 in the second quarter of 2010, due to ongoing adjustments to recruiter commission compensation and staffing levels.

Professional and consulting fees increased $133,236, or 22.7%, to $722,150 in the second quarter of 2010 compared to the comparable period in the prior year, as the Company continued to utilize the services of consultants to assist with certain functions related to business development, finance and compliance.

General and administrative expenses increased $149,418, or 17.3%, to $1,013,506 in the second quarter of 2010 from $864,088 in the second quarter of 2009.  Included in these expenses in the second quarter 2010 were $81,000 in rent expense, $54,000 in leasehold improvements amortization, and $15,000 in intangible asset amortization expense.

Other expenses (income) for the second quarters of 2010 and 2009 were $339,686 and $63,566, respectively.   Included in these expenses in the second quarter of 2010 were $180,000 in investor relations expense, $99,686 in legal and auditing expenses associated with our pending acquisition and $60,000 in investment banking expense.

Net losses for the second quarters ended June 30, 2010 and June 30, 2009 were $2,038,600 and $1,736,503, respectively.
 
 
 
11
 

 
Six Months Ended June 30, 2010 (“first half of 2010”) Compared to Six Months Ended June 30, 2009 (“first half of 2009”)
 
Revenue for the first half of 2010 was $3,338,792, an increase of $253,829, or 8.3%, when compared to $3,084,963 in revenue for the same period one year ago.  Revenue from permanent placement was basically flat at $532,569 in the first half of 2010 compared to $534,974 for the first half of 2009.

Revenue from contract appointments increased $256,232, or 10.1% in the first half of 2010 to $2,806,221 from $2,549,989 in revenue in the first half of 2009. This increase was the result of continued expansion in the employment of temporary hires (typically, 13 week contracts) in the allied healthcare field.

The Direct Costs associated with contract appointments in the first half of 2010 increased $193,417 or 8.6%, to $2,456,156 from $2,262,739 in 2009. These costs represent personnel salaries and benefits, temporary housing and travel costs. The gross profit from contract appointments increased to $350,065, (12.5% of revenue) from $287,250 (11.3% of revenue) in 2009.
 
Sales and marketing expenses were $111,234 in the first half of 2010, a decrease of $99,497, or 47.3%, from $210,731 in the first half of 2009. The decrease is due to our ongoing efforts to maximize returns from our marketing expenditures.

Recruiting salaries and costs decreased $285,277, or 25.0%, to $855,956 in 2010, primarily due to ongoing adjustments to recruiter commission compensation and staffing levels.

Professional and consulting fees increased $604,054, or 67.6%, to $1,497,677 in 2010 compared to the comparable period in the prior year, as the Company continued to utilize the services of consultants to assist with certain functions related to business development, finance, and compliance.

General and administrative expenses increased $273,135, or 16.2%, to $1,963,580 in 2010 from $1,690,445 in 2009. Included in these expenses in the first half of 2010 were $135,000 in rent expense, $78,000 in depreciation and leasehold improvements amortization, and $63,000 in legal expense.

Other expenses (income) for the six months ended June 30, 2010 and 2009 were $991,928 and $102,831, respectively.  Included in these expenses in 2010 were $630,000 in investor relations expense, $238,711 in legal and auditing expenses associated with our pending acquisition and $123,218 in investing banking expense.

Net losses for 2010 and 2009 were $4,540,473 and $3,216,831 respectively.
 
 
12
 

Liquidity and Capital Resources

Due to the operating losses and deficits, our independent auditors in their audit opinion have raised doubts about our ability to continue as a going concern. Despite these historical losses, management believes that it will be able to satisfy ongoing operating expenses. Management has done so to date by raising capital through the sale of the Company’s common stock. It will continue to do so, and/or seek third party financing, until such time as revenues from operations satisfy operating expenses.  There can be no assurance that a market for its stock or third party financing will be available, or if available, will be offered on terms that will not adversely impact our shareholders.

As of June 30, 2010, total current assets were $2,042,971 as compared to $1,920,740 on December 31, 2009. The change in total current assets is primarily attributable to a decrease in cash of $471,613 to $546,230 compared to the December 31, 2009 balance of $1,017,843 and an increase in accounts receivable of $313,391 to $1,117,773. The increase in accounts receivable is primarily attributable to the increase in revenue between the two periods. Prepaid expenses and other current assets increased due to purchases of property and equipment and a short-term employee advance repaid in the beginning of the third quarter 2010.  Total current liabilities increased $186,562 to $400,852 when compared to the $214,290 balance as of December 31, 2009.  The change is attributable to the timing of payments to vendors and temporary hires.

As of June 30, 2010, property and equipment were $417,127 after accumulated depreciation.
 
For the three month period ended June 30, 2010, we raised $2,369,043 from the sale of 9,477,040 shares of our common stock in private offerings.
 
Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and the accompanying notes. Actual results could differ from these estimates under different assumptions or conditions. The impact and any associated risks related to these policies on our business operations is discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 2 — Significant Accounting Policies and Related Information , in the Notes to Consolidated Financial Statements for the year ended December 31, 2009, included in our 2009 Annual Report. There have been no significant changes to our critical accounting policies in the second quarter of 2010.
 
 
13
 

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements. We do not anticipate entering into any off-balance sheet arrangements during the next 12 months.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4T.  CONTROLS AND PROCEDURES

(a)           Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) and determined that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.  The evaluation considered the procedures designed to ensure that the information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

(b)           Changes in Internal Control over Financial Reporting

During the period covered by this Quarterly Report on Form 10-Q, there was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(d) and 13d-15(d) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

(c)            Inherent Limitations of Disclosure Controls and Internal Controls over Financial Reporting

Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Projections of any evaluation or effectiveness to future periods are subject to risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
 
14
 

PART II. OTHER INFORMATION

 
ITEM 1.   LEGAL PROCEEDINGS.
 
None

ITEM 1A.  RISK FACTORS.

There has been no material changes in the risk factors associated with the Company’s operations since the filing of the Company’s Form 10-K which was filed with the Securities and Exchange Commission on March 30, 2010.  
 
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES
 
During the three month period ended June 30, 2010, we sold 9,477,040 shares of our common stock to accredited or sophisticated investors for aggregate gross proceeds of $2,369,043.
 
During the three month period ended June 30, 2010, there were conversions of 12,375 shares of our Series A preferred stock into 235,125 shares of our common stock. Each holder of the Series A preferred stock may convert each share of preferred stock into nineteen (19) shares of the Company’s common stock at any time.
 
During this same three month period, we issued 1,000,000 shares of our common stock as bonus payments for services rendered to us by two executives for a total cost of $130,000, using the fair market value price of $0.13 per share.
 
These securities were issued in transactions that were exempt from registration under Regulation D Rule 506 and/or Section 4(2) of the Securities Act of 1933, as amended (“Securities Act”), as transactions by an issuer not involving a public offering. All of the investors were knowledgeable, sophisticated and had access to comprehensive information about the Company and represented their intention to acquire the securities for investment only and not with a view to distribute or sell the securities. The Company placed legends on the securities stating that the securities were not registered under the Securities Act and set forth the restrictions on their transferability and sale.
 
ITEM 3.   DEFAULTS UPON SENIOR SECURITIES
 
 None
 
ITEM 4.   (REMOVED AND RESERVED)
 
 Not Applicable.
 
ITEM 5.  OTHER INFORMATION
                 None
 
 
15
 
 
ITEM 6.   EXHIBITS
 
 
 
Exhibit No.   Exhibit Description
     
 
Amendment to the Articles of Incorporation of Medical Connections Holdings, Inc. filed with the Florida Secretary of State on June 30, 2010. +
     
 
Certification by the Chief Executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+
     
 
Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +
     
 
Certification by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +
     
 
Certification by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +
     
+  Filed herewith
 
 
 
16
 

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized

 
  MEDICAL CONNECTIONS HOLDINGS, INC.  
       
Date:  August 11, 2010
By:
/s/ Jeffrey Rosenfeld  
    Jeffrey Rosenfeld,  
    Chief Executive Officer and Director  
       
 
 
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

     
       
Date:  August 11, 2010
By:
/s/ Jeffrey Rosenfeld     
    Jeffrey Rosenfeld     
   
Chief Executive Officer and Director
(Principal Executive Officer)
 
       
 
     
       
Date:  August 11, 2010
By:
/s/ Brian Neill   
    Brian Neill   
    Chief Financial Officer (Principal Financial Officer)  
       
 
 
 
17
 
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